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Information design, externalities, and government interventions

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  • Cheng Li
  • Yancheng Xiao

Abstract

We consider a model of Bayesian persuasion with spillovers. A sender provides information to persuade a receiver to take an action with external effects. We consider how government interventions, including corrective subsidy and tax, affect social welfare. In addition to internalizing externalities, government interventions affect social welfare through an informational channel. Subsidies to the sender's preferred action incentivize the sender to reveal less information, but taxes on the sender's preferred action incentivize the sender to reveal more information. Because of such an informational effect, the optimal subsidy and tax may be different from the size of the externalities. In some cases, social welfare is maximized with no government intervention.

Suggested Citation

  • Cheng Li & Yancheng Xiao, 2023. "Information design, externalities, and government interventions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(4), pages 821-839, August.
    • Handle: RePEc:bla:jpbect:v:25:y:2023:i:4:p:821-839
    DOI: 10.1111/jpet.12640
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